If investors are nervous about the prospect of Britain holding a referendum that could lead to it leaving the EU, they are not yet panicking – perhaps because any vote is unlikely before 2017. Foreign investment has been flowing strongly into the UK, helped by cuts in business taxes.
In 2013-14, the UK attracted the largest number of inward investment projects since records began in the 1980s, up 14 per cent on the previous year, according to UK Trade and Investment, the trade promotion agency.
EY, the professional services firm, found that Britain extended its lead last year as Europe’s top destination for global investors. And according to the UN, the UK remained second only to the US for the cumulative stock of inward investment, up 8 per cent at $1.6tn.
Yet there is undoubtedly concern in boardrooms. According to a poll by Deloitte, chief financial officers in large companies worry more about an EU vote than about higher interest rates or a housing bubble.
Sir Mike Rake, president of the CBI, the biggest business lobby group, warned recently that uncertainty over an EU referendum was “increasingly causing real concern for business regarding their future investment”. Foreign investors, especially in the City of London and in manufacturing, are among the most anxious.
Wall Street banks such as Bank of America, Citigroup and Morgan Stanley have been considering plans to move some London-based activities to Ireland – partly because the eurozone’s impending banking union threatens to isolate Britain, but also in the case of a UK exit from the EU. Most US and Asian banks base their European operations in the UK, giving them an automatic passport to operate in all 28 EU countries.
Executives fear the UK would be unlikely to receive the same “passporting” rights if it left the EU.
The UK hosts more than 250 foreign banks. In a poll by TheCityUK, a lobbying group, more than a third of business chiefs in financial and professional services said they would relocate staff to somewhere within the single market if Britain ended up outside it.
Britain’s £60bn car industry, mostly foreign-owned, has been vociferous. In a KPMG survey for the sector’s lobby group, 90 per cent of companies said leaving the EU would hurt their business, while 75 per cent said an exit would negatively affect future investment.
Carlos Ghosn, chief executive of Nissan, the UK’s biggest carmaker by output, said last year it would be forced to reconsider any future investment if the UK left the EU. Japan’s Hitachi has also said the future of its large investments in nuclear and rail could be in doubt.
Companies trying to assess the risk of “Brexit” face difficult questions, not least whether a referendum will happen. David Cameron, prime minister, has pledged to negotiate reforms and hold an in-out referendum by 2017 if the Conservatives win next year’s general election. But Labour and the Liberal Democrats support a vote only if there is a further shift of powers to Brussels.
A referendum is assured only if the Tories win an overall majority, which they have not achieved since 1992. Mr Cameron says a referendum would be a precondition of any coalition negotiations, but Nick Clegg, deputy prime minister, has refused to say what he would do. Then there is the issue of whether Mr Cameron can renegotiate successfully. So far, he has urged steps such as curbing access to benefits for migrant workers, a greater role for national parliaments in EU policy making and an exemption from the goal of “ever closer union”. Some think these could be met without treaty change, but they are unlikely to satisfy eurosceptics who want repatriation of powers such as employment and immigration policy.
In a previous referendum in 1975, opinion polls initially showed a majority for withdrawal but eventually the UK voted by two to one to stay in. Polls today also indicate that if Mr Cameron secured favourable terms, there could be a majority vote to stay.
More uncertain still is what deal the UK could get if it left. Options would include a Swiss-style arrangement based on bilateral accords with the EU; a customs union of the kind Turkey has with the EU; or, like Norway, membership of the European Economic Area, giving Britain access to the single market but no formal ability to shape the rules.
Pro-EU figures warn that the UK’s bargaining power would be limited without it being freer from regulations.
Investors do not welcome this lack of clarity. “It’s an unnecessary risk,” says one. “Foreign investors come to the UK to access the European market. The uncertainty may lead some to cancel or defer decisions.”